UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

 

For the quarterly period ended September 30, 2015

or

For the transition period from            to            

 

 

 

 

Commission file number:        000-54192

 

REVA MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  þ     No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  þ     No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  o     No  þ

As of November 1, 2015, a total of 38,082,778 shares of the registrant’s Common Stock, $0.0001 par value per share, were outstanding.

 

 

 

 

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REVA MEDICAL, INC.

FORM 10-Q –– QUARTERLY REPORT

For the Quarter Ended September 30, 2015

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

REFERENCES

Corporate Information

We incorporated in Delaware in October 2010. Our principal executive offices are located at 5751 Copley Drive, San Diego, CA 92111, U.S.A., and our telephone number is (858) 966-3000. Our website address is www.revamedical.com. The information on, or accessible through, our website is not part of this report. Unless the context implies otherwise, references in this report and the information incorporated herein by reference to “REVA Medical,” “REVA,” the “Company,” “we,” “us,” and “our” refer to REVA Medical, Inc.

Currency

Unless indicated otherwise in this report, all references to “$” or “dollars” refer to United States dollars, the lawful currency of the United States of America. References to “A$” refer to Australian dollars, the lawful currency of the Commonwealth of Australia.

Trademarks

The names Fantom^® and ReZolve^® are trademarked by us. All other trademarks, trade names, and service marks appearing in this report are the property of their respective owners. Use or display by us of other parties’ trademarks, trade dress, or products is not intended to and does not imply a relationship with, or endorsement or sponsorship of, us by the trademark or trade dress owner.

 

 

 

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PART I.  FINANCIAL INFORMATION

 

Item 1. Unaudited Consolidated Financial Statements

 

REVA Medical, Inc.

Consolidated Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

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REVA Medical, Inc.

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

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REVA Medical, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

1.  Background and Basis of Presentation

Background:  REVA Medical, Inc. (“REVA” or the “Company”) was incorporated in California in 1998 under the name MD3, Inc. In March 2002, we changed our name to REVA Medical, Inc. In October 2010, we reincorporated in Delaware. We established a non-operating wholly owned subsidiary, REVA Germany GmbH, in 2007. In these notes the terms “us,” “we,” or “our” refer to REVA and our consolidated subsidiary unless context dictates otherwise.

We do not yet have a product available for sale; our product(s) will become available following completion of required clinical studies with acceptable data and when, and if, we receive regulatory approval. We are currently developing and testing a bioresorbable stent to treat vascular disease in humans. This stent, which we have named Fantom, was first implanted in humans during December 2014. We enrolled 110 patients in a clinical trial with Fantom between March 2015 and September 2015, from which we will obtain follow-up data at a six-month time point. If this data has acceptable safety and efficacy results, we intend to apply for a European CE Marking, the regulatory approval that would allow us to commercialize Fantom in Europe and other countries that recognize the European CE Mark.

In December 2010 we completed an initial public offering (the “IPO”) of our common stock in Australia and registered with the U.S. Securities and Exchange Commission (“SEC”) and, consequently, became an SEC filer. Our stock is traded in the form of CHESS Depository Interests (“CDIs”) on the Australian Securities Exchange (“ASX”); each share of our common stock is equivalent to ten CDIs. Our trading symbol is “RVA.AX.”

Basis of Presentation:  We have prepared the accompanying consolidated financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the SEC for reporting of interim financial information and, therefore, certain information and footnote disclosures normally included in annual financial statements have been omitted. Accordingly, these interim financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report and with the audited financial statements and accompanying footnotes included in our Annual Report on Form 10-K (the “Form 10-K”) for the year ended December 31, 2014.

Our consolidated financial statements include the accounts of REVA and our wholly owned subsidiary. All intercompany transactions and balances, if any, have been eliminated in consolidation. These interim consolidated financial statements are unaudited; the consolidated balance sheet as of December 31, 2014 was derived from the Company’s audited financial statements included in our Form 10-K for the year ended December 31, 2014. The interim financial statements have been prepared on the same basis as our annual financial statements and, in our opinion, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair statement of the results of these interim periods have been included. The results of operations for the nine months ended September 30, 2015 are not necessarily indicative of the results to be expected for the year ending December 31, 2015 or for any other interim period.

Liquidity:  In November 2014, we completed a financing to provide ongoing capital for our operations. The financing comprised the issuance of $25,000,000 in convertible notes and 8,750,000 warrants for the purchase of common stock. The convertible notes and the warrants remained outstanding, and we had $12,342,000 in cash and investments available for operations, as of September 30, 2015. Subsequent to our third quarter end, on October 1, 2015, we received cash proceeds of $9,506,000 from the issuance of common stock upon the exercise of 4,375,000 warrants, which provided us cash and investments available for operations of $21,848,000 as of October 1, 2015. We believe this October 1, 2015 balance will be sufficient to fund our operating and capital needs into, and possibly through, the third fiscal quarter of 2016. The remaining 4,375,000 warrants are exercisable at a price of $2.6073 per share; when and if they are exercised, we have the potential to receive $11,407,000 additional cash proceeds.

We have experienced recurring losses and negative cash flows from operating activities since our inception and, as of September 30, 2015, we had an accumulated deficit of $304,917,000. Until we generate revenue, and at a level to support our cost structure, we expect to continue to incur substantial operating losses and net cash outflows. Even if we do attain revenue, we may never become profitable and even if we do attain profitable operations, we may not be able to sustain that profitability or positive cash flows on a recurring basis. These conditions, combined with the uncertainty of the timing of receipt of proceeds, if any, from the exercise of warrants to purchase common stock, raise substantial doubt about our ability to continue as a going concern.

 

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

1.  Background and Basis of Presentation (continued)

Liquidity (continued): If the remaining warrants are not exercised, or are not exercised to coincide with the timing of our liquidity needs, or even if the warrants are exercised, we may need to raise further capital in the future to fund our operations until such time as we can sustain positive cash flows. If we are unable to raise sufficient additional capital when needed, we may be compelled to reduce the scope of our operations and planned capital expenditures or sell certain assets, including our intellectual property assets. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Use of Estimates:  In order to prepare our financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Our most significant estimates relate to the fair value of our convertible notes payable, the fair value of our warrant liability, our operating expense accruals, including clinical study expenses, and stock-based compensation. Actual results could differ from our estimates.

 

2.  Fair Value Measurements

We measure the fair value of our financial and non-financial assets and liabilities at each reporting date in accordance with the fair value hierarchy according to GAAP, which requires that fair value measurements be classified and disclosed in one of the following three categories:

Level 1 – Quoted market prices for identical assets or liabilities in active markets at the measurement date;

Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities in active or non-active markets, or other inputs that can be corroborated by observable market data for substantially the full term of an asset or liability; and,

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of an asset or liability, including management’s best estimate of the factors that market participants would use in pricing an asset or liability at the measurement date.

We carry our convertible notes payable and common stock warrant liability at fair value. We carry our other financial instruments at amortized cost, which we consider to be reasonable estimates of their respective fair values due to their short-term nature and, therefore, fair value information is not provided in the following table; these other financial instruments include cash, investments, accounts payable, and accrued expenses. Utilizing the lowest level inputs available under the measurement hierarchy, the fair values of our measured financial instruments are as follows:

 

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

 2.  Fair Value Measurements (continued)

We had no Level 1 financial instruments through September 30, 2015.

Our Level 2 financial assets consist of certificates of deposit (“CDs”) that are held to maturity and carried at cost; their fair value is determined each reporting period through quoted market prices of similar instruments in active markets. Unrealized losses on these CDs as of December 31, 2014 and September 30, 2015 were $4,000 and $1,000, respectively.

Our Level 3 financial liabilities, which are recurring, consist of convertible notes payable (the “Notes”) and warrants for the purchase of common stock, all of which were issued in November 2014. The fair values of these liabilities are determined utilizing a binomial valuation model, which requires use of unobservable inputs that are determined by management, with the assistance of independent experts. These inputs represent our best estimates, but involve certain inherent uncertainties. We used the market value of the underlying stock, a life equal to the contractual life of the financial instrument, incremental borrowing rates and bond yields that correspond to instruments of similar credit worthiness and the instrument’s remaining life, an estimate of volatility based on the historical prices of our trading securities, and we made assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, and to comply with the terms and conditions of our Notes. A summary of the assumptions used to value the Notes and warrants is as follows:

 

 

A significant change in the market price per share, expected volatility, or bond yield of equivalent securities, in isolation, would result in significantly higher or lower fair value measurements. In combination, changes in these inputs could result in a significantly higher or lower fair value measurement if the input changes were to be aligned, or could result in a minimally higher or lower fair value measurement if the input changes were of a compensating nature.

 

A total of $28,180,000 and $34,311,000 in unrealized losses arising from the change in fair value on our Level 3 financial liabilities were recorded during the three- and nine-month periods ended September 30, 2015, respectively. Our Level 3 fair value activity through September 30, 2015 is as follows:

 

 

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

3.  Convertible Notes Payable and Warrants to Purchase Common Stock

In November 2014, we issued 250 convertible notes payable, each with a face value of $100,000, for total cash proceeds of $25,000,000. The Notes are convertible into 11,506,155 shares of common stock, which is a conversion rate of $2.17275 per share. The Notes are convertible at any time at the holders’ election, except the Notes will automatically convert in the case where we have received a CE Mark approval for our Fantom product and have sustained a market trading price of at least A$0.60 per CDI for 20 consecutive trading days. The Notes mature on November 14, 2019, if not converted or redeemed earlier. Interest accrues on the Notes at the rate of 7.54 percent per annum, compounded annually, and is payable upon redemption or maturity; accrued interest is not payable or convertible upon conversion of the Notes. The Notes provide the holders a one-time option for cash redemption in January 2017, if not previously converted or redeemed, for the face value plus accrued interest.

Following an analysis of the embedded and derivative features of the Notes upon their issuance in 2014, and a projection of the volatility of their effective interest rates under the cost method, we elected to utilize fair value accounting for the Notes. Management believes the fair value method of accounting provides a more appropriate presentation of these liabilities than would be provided under the cost method. The fair value of the Notes as of September 30, 2015 was calculated to be $57,540,000, which was $32,540,000 more than the unpaid principal balance of the Notes. The increases of $14,490,000 and $19,760,000 in the fair value of the Notes during the three and nine months ended September 30, 2015, respectively, were recorded as losses in the consolidated statement of operations.

In connection with the issuance of the Notes in November 2014, we issued warrants to the noteholders to purchase up to 8,750,000 shares of common stock. On October 1, 2015, a total of 4,375,000 warrants were exercised for $9,506,000 cash proceeds. The remaining 4,375,000 warrants are exercisable immediately at $2.6073 per share and expire in November 2019 if not exercised. None of the warrants had been exercised as of September 30, 2015.

The fair value of the warrants as of September 30, 2015 was calculated to be $29,940,000. The increases of $13,690,000 and $14,551,000 in fair value of the warrant liability during the three and nine months ended September 30, 2015, respectively, were recorded as losses in the consolidated statement of operations.

 

4.  Balance Sheet Details

Property and Equipment and Accrued Expenses:  Components of our property and equipment and accrued expenses and other current liabilities are as follows:

 

 

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

5.  Income Taxes

We have reported tax net operating losses since our inception through September 30, 2015; therefore, no provision for income taxes has been recorded since our inception. The net operating tax loss carryforwards arising from our net losses may be available to offset future taxable income for income tax purposes; however, under Internal Revenue Code (“IRC”) Sections 382 and 383, use of the net operating tax loss carryforwards, as well as our research tax credit carryforwards, may be limited based on cumulative changes in ownership. We have established a valuation allowance against our net deferred tax assets due to the uncertainty surrounding the realization of those assets and we, therefore, have no deferred asset or liability balance for any reporting period. We periodically evaluate the recoverability of the deferred tax assets and, when it is determined that it is more-likely-than-not that the deferred tax assets are realizable, the valuation allowance will be reduced. Due to our valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.

 

6.  Stock-Based Compensation

The Plan:  Our 2010 Equity Incentive Plan, as amended (the “Plan”), provides for grants of incentive and non-qualified stock options for purchase of our common stock at a price per share equal to the closing market price on the date of grant and for awards of restricted stock units and restricted stock for no consideration payable by the recipient. The number of shares reserved for issuance under the Plan may be increased annually by up to three percent of the outstanding stock of the Company and on January 1, 2015, an additional 1,002,893 shares were reserved for issuance under the Plan. An aggregate of 7,956,153 shares are reserved for issuance under the Plan as of September 30, 2015. All stock issuances under the Plan are made with new shares from our authorized but unissued common stock. The term of grants and awards under the Plan may not exceed ten years.

Employees, non-employee directors, and consultants are eligible to participate in the Plan. For purposes of determining stock-based compensation expense, we include non-employee directors with employees; we account for consultant compensation expense separately. Option activity under the Plan is as follows

 

 

The majority of options granted by the Company vest over four years, with 25 percent vesting on the one-year anniversary of the vesting commencement date and 75 percent vesting in equal monthly installments thereafter. Those options are exercisable at any time but, if exercised, are subject to a lapsing right of repurchase by us at the exercise price until fully vested. During March 2015, we granted a total of 316,000 options that vest based on certain performance achievements of the Company. We estimated the vesting term, which ranges from approximately nine months to two years with a weighted average vesting term of 15 months, on the date of grant based on our internal timelines and operating projections.

No tax benefits arising from stock-based compensation have been recognized in the consolidated statements of operations and comprehensive loss through September 30, 2015.

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

6.  Stock-Based Compensation (continued)

The Plan (continued):  During July 2012, January 2013, and May 2013 we awarded 33,000 shares, 40,000 shares, and 47,500 shares, respectively, of restricted stock; 25 percent of each award vests on each annual anniversary date of the award. Through September 30, 2015, none of the restricted stock had been cancelled.

During March 2015, we awarded 824,200 restricted stock units (“RSUs”) to employees. These RSUs vest based on certain performance achievements of the Company; we estimated the vesting term, which ranges from approximately 14 months to two years with a weighted average vesting term of 17 months, on the date of award based on our internal timelines and operating projections. During May 2015, we awarded 160,000 RSUs to employee and non-employee directors; such RSUs vest on the earlier of May 26, 2016 or one day prior to our 2016 annual stockholder meeting. Each RSU entitles the recipient to one share of our common stock upon vesting. Through September 30, 2015, none of the RSUs had vested and none had been cancelled.

Grants and Awards to Employees:  We account for option grants, restricted stock awards, and RSU awards to employees based on their estimated fair values on the date of grant or award, with the resulting stock-based compensation recorded over the requisite service period on a straight-line basis. For the options and RSUs that vest upon performance achievements, we record only the compensation expense for the performance targets that are probable of being achieved and we record such expense on a straight-line basis over the vesting period. During the nine months ended September 30, 2015, we determined that two of the three performance targets for our performance-based awards were probable of being achieved and, therefore, recorded expense for those awards only. Stock-based compensation arising from employee options and awards under the Plan is as follows:

 

 

The fair value of restricted stock and RSU awards is equal to the closing market price of our common stock on the date of award. The fair value of options granted was estimated on the date of grant using the following weighted-

average assumptions:

 

 

The assumed risk-free interest rate was based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected life of the option. The assumed volatility was calculated from the historical market prices of a selected group of publicly traded companies considered to be our peers; we use peer group data due to the fact that we have limited historical trading data. For options that vest based on passage of time, the expected option life was calculated using the simplified method under the accounting standard for stock compensation and a ten-year option expiration; we use the simplified method because we do not yet have adequate history as a public company to establish a reasonable expected life. For options that vest based on performance achievements, the expected life was calculated based on the requisite service periods estimated by management and a ten-year option expiration. The expected dividend yield of zero reflects that we have not paid cash dividends since inception and do not intend to pay cash dividends in the foreseeable future. The options granted to employees during the nine months ended September 30, 2015 had a weighted average grant date fair value of $2.40.

The aggregate intrinsic value of options exercised during the nine months ended September 30, 2014 and 2015 was $561,000 and $417,000, respectively.

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

6.  Stock-Based Compensation (continued)

Stock Options to Consultants:  We account for stock options granted to consultants at their fair value. Under this method, the fair value is estimated at each reporting date during the vesting period using the Black-Scholes option-pricing model. The resulting stock-based compensation expense, or income if the fair value declines in a reporting period, is recorded over the consultant’s service period. Options to purchase 110,000 shares of common stock were granted to consultants during the nine months ended September 30, 2014; no options were granted to consultants during the nine months ended September 30, 2015. All stock options granted to consultants had either vested or been cancelled as of March 31, 2015; therefore, no compensation expense was recorded during the three months ended September 30, 2015. Stock-based compensation expense or (income) arising from consultant options granted under the Plan is as follows:

 

 

The weighted-average fair value of unvested consultant options at September 30, 2014 was estimated to be $1.15 per share based on weighted-average assumptions of a risk-free interest rate of 2.47 percent, volatility of 58.7 percent, an option life of 9.19 years, and a dividend yield of zero percent. The assumed risk-free interest rate was based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected life of the option. The assumed volatility was calculated from the historical market prices of a selected group of publicly traded companies considered to be our peers; we use peer group data due to the fact that we have limited historical trading data. The expected option life is the remaining term of the option. The expected dividend yield of zero reflects that we have not paid cash dividends since inception and do not intend to pay cash dividends in the foreseeable future.

 

7.  Commitments and Contingencies

We have licensed certain patents and other intellectual property rights related to the composition and coating of our bioresorbable stent and our other biomaterial products. Terms of these licenses include provisions for royalty payments on any future sales of products, if any, utilizing this technology, with provisions for minimum royalties once product sales begin. The amount of royalties varies depending upon type of product, use of product, stage of product, location of sale, and ultimate sales volume, and ranges from a minimum of approximately $25 per unit to a maximum of approximately $100 per unit sold, with license provisions for escalating minimum royalties that could be as high as $2.2 million per year. Additionally, in the event we sublicense the technology and receive certain milestone payments, the licenses require that up to 40 percent of the milestone amount be paid to the licensors. Additional terms of the technology licenses include annual licensing payments of $175,000 until the underlying technology has been commercialized. Terms of the licenses also include other payments to occur during commercialization that could total $950,000, payment of $350,000 upon a change in control of ownership, payments of up to $300,000 annually to extend filing periods related to certain technology, and payment of patent filing, maintenance, and defense fees. The license terms remain in effect until the last patent expires.

 

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REVA Medical, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

 

 

 

8.  Net Loss Per Common Share

Basic net loss per common share is calculated by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common share equivalents outstanding for the period determined using the treasury-stock method and the if-converted method, as applicable. For purpose of this calculation, common stock options and restricted stock subject to forfeiture are considered to be common stock equivalents; common share equivalents are included in the calculation of diluted net loss per share only when their effect is dilutive.

The following weighted average shares were excluded from the computations of diluted net loss per share because including them would have been antidilutive.

 

 

9.  Subsequent Events

On October 1, 2015, the Company received cash proceeds of $9,506,000 and issued 4,375,000 shares of common stock from the exercise of warrants. Following the exercise, a total of 38,082,778 shares of common stock were outstanding and 4,375,000 warrants remained outstanding.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q and with our consolidated financial statements and the related notes thereto that are contained in our Annual Report on Form 10-K for the year ended December 31, 2014. In addition to historical information, the following discussion and analysis includes forward-looking statements that involve risks, uncertainties, and assumptions. Forward-looking statements are all statements other than statements of historical facts, such as those statements regarding the projections and timing surrounding our plans to complete clinical and regulatory evaluations, receive regulatory approvals and commence commercial sales, develop pipeline products, incur losses from operations, and assess and obtain future financings for operating and capital requirements.

We caution readers that forward-looking statements are not guarantees of future performance and actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, including those discussed under “Risk Factors” in our Form 10-K for the year ended December 31, 2014. Investors are cautioned that many of the assumptions on which our forward-looking statements are based are likely to change after our forward-looking statements are made. Further, we may make changes to our business plans that could or will affect our results. We caution investors that we do not intend to update our forward-looking statements more frequently than quarterly, notwithstanding any changes in our assumptions, changes in our business plans, our actual experience, or other changes, and we undertake no obligation to update any forward-looking statements.

Overview

We are a pre-revenue stage medical device company working toward commercialization of our proprietary technologies to provide minimally invasive medical devices for the treatment of conditions in the human body. We are in the later stages of developing and clinically testing bioresorbable drug-eluting coronary stents. We refer to bioresorbable stents as “scaffolds” because they are not permanent devices like metal stents that are commonly used today. In clinical use, a scaffold is guided by x-ray by an interventional cardiologist during a minimally invasive surgery to a coronary artery location with a delivery catheter system, whereupon it is deployed to restore blood flow to the artery and medicate the artery to prevent further blocking, or restenosis. Our scaffolds combine our proprietary bioresorbable polymer with various designs, including conventional designs and internally developed designs. Our scaffolds are designed to offer full x-ray visibility, clinically relevant sizing, and a controlled and safe resorption rate.

Our scaffold products have not yet been approved for sale and will require successful clinical trial results and regulatory approval before they can generate sales. We have invested significant time and funds in development, having performed scientific research, engineering development, and testing in laboratory and preclinical studies. We have developed, tested, and selected the polymer formulation, tested and selected the anti-restenotic drug and coating process, created and iterated the device design, and identified and implemented methods and processes to produce and test the scaffold. We designed and performed extensive preclinical tests that ranged from bench and engineering studies to in vitro and in vivo laboratory studies. In 2007, we enrolled patients in a small human clinical study that proved the viability of the technology while confirming the areas needing further development. We have been developing and advancing our scaffolds in both design and polymer composition since that study and have undertaken significant testing that has shown the viability of the technology across various models.

We are currently enrolling patients in a clinical trial of our Fantom scaffold. We enrolled 110 patients in this trial between March 2015 and September 2015, from which we will obtain follow-up data at a six-month time point. If this data has acceptable safety and efficacy results, we plan to apply for European regulatory approval in approximately the third quarter of 2016. In October 2015, we began enrolling up to 110 supplemental patients in the trial to obtain additional clinical data to facilitate commercialization needs. Prior to developing Fantom, we had enrolled a total of 165 patients in three clinical trials between June 2007 and January 2014 with predecessor scaffolds that were developed utilizing our proprietary x-ray visible polymer in combination with our “slide and lock” stent design. While these predecessor scaffolds demonstrated viability of the technology, we believe the enhanced characteristics of Fantom, including its conventional design, better position it for commercial success. Fantom’s enhanced features include a unibody design, lower strut thickness, smaller crossing profile, optimized polymer properties, and streamlined manufacturing processes, while still maintaining all the beneficial features of our prior scaffolds. In March 2014 we announced Fantom as our sole focus for development and testing and concurrently reduced headcount by approximately 45 percent and reduced other overhead costs to a lesser extent.

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Our current plan is to apply for European CE Marking, the regulatory approval that would allow us to sell our scaffolds in Europe and other countries that recognize the CE Mark. When, and if, we receive CE Mark approval, we will evaluate how best to implement our sales, marketing, and distribution strategies for commercialization. While our Fantom scaffold could be approved for sale in late 2016 or early 2017, our efforts to generate substantial revenue and achieve positive cash flows from our operations may take several years, even if our clinical results are favorable.

In order to produce quantities of our scaffold large enough to accommodate commercial needs, when that time arrives, we will need to scale up our manufacturing processes and expand our capabilities to allow for such things as additional scaffold sizes. We have developed plans and have begun implementation of the methods and processes for such manufacturing scale-up and will continue such work during the remainder of 2015 and throughout 2016 as we approach commercialization.

During the course of our product development and testing, we have invented, co-invented, and licensed a portfolio of proprietary technologies. Our design-related technologies have been invented by our employees and consultants and our materials-related technologies have been either invented by our employees or licensed from, or co-invented with, Rutgers, The State University of New Jersey. We consider our patent portfolio to be significant and have invested considerable time and funds to develop and maintain it. Our goal is to continue to perform feasibility tests on additional technologies in our patent portfolio as our resources allow and, if feasibility is proven, determine a course of development for additional products.

We perform all of our research and development activities from one location in San Diego, California. As of September 30, 2015, we had 53 employees, a majority of whom are degreed professionals and six of whom are PhDs. We leverage our internal expertise with contract research and preclinical laboratories, outside catheter manufacturing, and other outside services as needed. We have three clean rooms and multiple engineering and chemistry labs at our facility, in addition to our corporate and administrative office. We are ISO certified to the medical device standard 13485:2012 and intend to maintain the certification to support our commercialization plans.

In November 2014, we completed a financing to provide ongoing capital for our operations, including the Fantom clinical trial and application for CE Mark. This financing comprised the issuance of 250 senior unsecured convertible notes, each with a face value of $100,000, and warrants to purchase 8,750,000 shares of our common stock. We received cash proceeds of $25.0 million from the notes in November 2014 and cash proceeds of $9.5 million from the issuance of common stock upon the exercise of 4,375,000 of the warrants on October 1, 2015. We have the potential to receive an additional $11.4 million cash proceeds when, and if, the remainder of the warrants are exercised. Both the notes and the warrants have a five-year maturity or expiration, respectively.

We have not yet developed a product to a saleable stage and we have not, therefore, generated any product or other revenues. Our development efforts have been funded with a variety of capital received from angel investors, venture capitalists, strategic partners, hedge funds, the proceeds from our IPO in 2010, and the issuance of convertible notes in November 2014. Since our inception through September 30, 2015, we received approximately $153.9 million in equity proceeds and $53.5 million from issuances of notes payable ($28.5 million of the notes payable were converted to common stock upon our IPO in 2010). As of September 30, 2015, we had approximately $12.3 million in cash and investments available for operations; we received $9.5 million cash proceeds from the exercise of warrants on October 1, 2015. We believe the combined balance of $21.8 million as of October 1, 2015 will be sufficient to fund our operating and capital needs into, and possibly through, the third fiscal quarter of 2016.

We have incurred substantial losses since our inception; as of September 30, 2015, we had accumulated a deficit of approximately $304.9 million. We expect our losses to continue as we complete our development work, clinical studies, and preparations for commercialization during the remainder of this year and in 2016; if these efforts are successful and we are able to obtain regulatory approval, we expect to commence product sales thereafter. In order to successfully transition to profitable operations, we will need to achieve a level of revenues and product margins to support the Company’s cost structure. Until such time as we generate positive cash flow, we plan to continue to fund our operating and capital needs by utilizing our current cash and investments. If the remainder of the warrants issued in November 2014 are not exercised, or not exercised on a timeframe that coincides with our cash needs, we may need to raise additional capital through equity or debt financings or strategic or other transactions.

Our company was founded in California in June 1998 and named MD3, Inc. We changed our name to REVA Medical, Inc. in March 2002. We reincorporated from the State of California to the State of Delaware in October 2010; as a result, the rights of our stockholders are governed by the Delaware General Corporation Law. We formed a wholly owned subsidiary in Germany in 2007 to facilitate our clinical trials and our planned commercialization of products; we have not used this subsidiary yet for any operating activities.

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Key Components of our Results of Operations

We are still in a pre-revenue stage and our activities are focused on further developing and testing our bioresorbable coronary scaffold with the goal of commercially selling it. We additionally perform minimal research and tests to determine the feasibility of other product possibilities. Consequently, our operating results primarily consist of research and development expenses, including costs to perform clinical trials, general and administrative expenses, and other expenses that are largely the costs of the convertible notes and warrants that we issued in November 2014 to provide the funds to continue our developments efforts.

Research and Development Expenses:  Our research and development expenses arise from a combination of internal and external costs. Our internal costs primarily consist of employee salaries and benefits, facility and other overhead expenses, and engineering and other supplies that we use in our labs for prototyping, testing, and producing our scaffolds and other product possibilities. Our external costs primarily consist of contract research, engineering consulting, polymer consulting and certain production costs, polymer lasing costs, catheter system and anti-restenotic drug purchases, preclinical and clinical study expenses, and license fees paid for the technology underlying our polymer materials. All research and development costs are expensed when incurred.

Historically, our research and development expenses have represented between 70 and 75 percent of our total operating expenses. Upon our change in development programs to Fantom in early 2014, we saw a decrease in research and development expenses, primarily due to a concurrent reduction in headcount by approximately 46 percent upon the change and a reduction of other development and clinical trial expenses due to the earlier stage of development for Fantom compared to the predecessor program. Research and development expenses as a percentage of our total operating expenses were 65 percent for the year ended December 31, 2014 and 70 percent for the nine months ended September 30, 2015. We expect our research and development expense to continue to increase during the remainder of 2015 as we continue the clinical enrollment and testing of Fantom. We enrolled 110 patients in the clinical trial between March 2015 and September 2015. We plan to obtain follow-up data at a six-month time point on these patients, and if this data has acceptable safety and efficacy results, apply for regulatory approval of Fantom in approximately the third quarter of 2016. We are also enrolling 110 supplemental patients with Fantom to obtain additional data for commercialization purposes. We expect to incur increasing expenses in the future for development of final manufacturing processes and equipment as we prepare for commercialization and as we research the feasibility of developing additional products from technology in our intellectual property portfolio.

General and Administrative Expenses:  Our general and administrative expenses consist primarily of salaries and benefits for our executive officers and administrative staff, corporate office and other overhead expenses, legal expenses including patent filing and maintenance costs, audit and tax fees, investor relations and other public company costs, and travel expenses. Although our patent portfolio is one of our most valuable assets, we record legal costs related to patent development, filing, and maintenance as expense when the costs are incurred since the underlying technology associated with these assets is purchased or incurred in connection with our research and development efforts and the future realizable value cannot be determined.

Historically, our general and administrative expenses have represented between 25 and 30 percent of our total operating expenses; they represented 35 percent of total operating expenses for the year ended December 31, 2014 and 30 percent for the nine months ended September 30, 2015. We anticipate that we will continue to invest in patents at similar levels as we have in the past. Additionally, we anticipate that we will expand our corporate infrastructure in late 2015 and 2016 to continue to support the needs of being a public company and to prepare for commercial sales of our products, which will increase our general and administrative expenses accordingly. We also expect to begin to incur sales and marketing expenses beginning in 2016 as we prepare for product sales in the event we receive CE Marking.

Other Income and Expense:  Since our IPO in 2010 and through October 2014, our other income and expense was relatively immaterial and primarily comprised interest income on investments and gains and losses from foreign currency fluctuations. Following our issuance of convertible notes and warrants in November 2014, the components of other income and expense also include interest expense on the notes and gains or losses related to the changes in fair values of both the notes and warrants. We recorded the notes and warrants at fair value upon issuance and we remeasure their fair values at each reporting date. If those fair values change, we record a corresponding gain (upon a decrease in fair value) or loss (upon an increase in fair value) in the consolidated statement of operations. Accordingly, we expect our other income and expense to fluctuate, possibly by a significant amount, in future periods by the gains or losses on changes in fair value until such time as the notes are either converted into common stock or repaid and the warrants are either exercised or expire. Also, we will continue to accrue and record interest expense on the notes at the rate of 7.54 percent per annum until they are either converted or repaid. We do not expect any material changes in interest income or foreign currency gains or losses during the remainder of 2015.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. In preparing our financial statements and related disclosures, we are required to use estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, stockholders’ equity, expenses, and the presentation and disclosures related to those items. We base our estimates and assumptions on historical experience and other factors that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis; changes in our estimates and assumptions are reasonably likely to occur from period to period. Additionally, actual results could differ significantly from the estimates we make. To the extent there are material changes in our estimates or material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected.

We believe the following accounting policies involve a greater degree of judgment and complexity than any other of our accounting policies and, therefore, are the most critical to understanding and evaluating our consolidated financial condition and results of operations. Our other key accounting policies are less subjective and, therefore, are not included here.

Research and Development Costs:  We expense research and development costs as incurred. Our preclinical and clinical study costs are incurred on a contract basis and generally span a period longer than a month. We record costs incurred under these contracts as the work occurs and make payments according to contractual terms. Until a contract is completed, we estimate the amount of work performed and accrue for estimated costs that have been incurred but not paid. As actual costs become known, we adjust our accruals. We expect our clinical expense accruals to increase as we continue to initiate and enroll patients in clinical trials. We expect to make estimates of work performed throughout the term of these trials, each of which is currently expected to be five years or longer. As these costs increase, if our estimates are inaccurate, possible material changes to our accruals could be required, which could materially affect our results of operations within any fiscal period. To date, there have been no material changes in our research and development expense estimates, including our estimates for accrued clinical costs.

Stock-Based Compensation:  We recognize stock-based compensation expense in connection with stock option grants and restricted stock and restricted stock unit (“RSU”) awards to employees, directors, and consultants. We have granted options and restricted stock that vest based on the passage of time and, beginning in March 2015, we have granted options and RSUs that vest based on achievement of performance milestones.

For awards to employees and directors, we determine the amount of compensation expense by estimating the fair value of the option, stock, or RSU on the date of award, with the resulting stock-based compensation recorded over the vesting period, which ranges from one to four years, on a straight-line basis. For stock options and RSUs that vest upon performance achievements, we record only the compensation expense for the performance targets that are probable of being achieved and we record such expense on a straight-line basis over the vesting period. During the nine months ended September 30, 2015, we determined that two of the three performance targets for our performance-based awards were probable of being achieved and, therefore, recorded expense for those awards only. All stock-based compensation expense is recorded as either research and development or general and administrative expense based on a recipient’s work classification. For stock options, we estimate the fair value by using the Black-Scholes option pricing model. For the model inputs, we use the fair value of the underlying common stock, a risk-free interest rate that corresponds to the expected life of the option, an expected option life ranging between 5.65 and 6.25 years, and an estimate of volatility based on the market trading prices of comparative peer companies. The fair value of restricted stock and RSUs awarded is equal to the closing market price of our common stock on the date of award.  Additionally, we reduce the amount of recorded compensation expense to allow for potential forfeitures of the options; the forfeiture rate is based on our actual historical forfeitures and has ranged from approximately 2.3 percent to 3.4 percent.

We have not granted any consultant options since January 2014; as of March 31, 2015, no consultant options remained subject to vesting. When we do have unvested consultant options, we estimate the fair value at date of grant and at each subsequent accounting date and record compensation expense based on the fair value during the service period of the consultant. We estimate the fair value by using the Black-Scholes option pricing model with the same approach to inputs and assumptions as we use to estimate the fair value of options granted to employees, except we use the remaining term as the expected life of the option.

As a result of our use of estimates for the fair value calculations and the performance-based achievement probabilities, if factors change and we use different assumptions, the amount of our stock-based compensation expense could fluctuate materially in the future. Also, we expect to increase the level of awards for options, restricted stock, and/or RSUs as we expand our workforce and prepare for commercialization, which could result in an increase of our stock-based compensation in the future.

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Notes Payable:  We analyze notes payable as of their issue date to determine their classification, issue discounts or premiums, and embedded or derivative features, if any. If embedded or derivative features exist, such as a right to convert notes into common stock, we evaluate the features in accordance with accounting guidance for derivative securities, determine whether such features would give rise to separate accounting, and, if they do, make an election to account for the notes at cost or at fair value.

We elected to account for the convertible notes we issued in November 2014 at fair value, which does not require separate accounting for derivative features. On the issue date of convertible notes, we record the difference, if any, between the issue price of the notes and their fair value as a gain or loss in the consolidated statement of operations. Until such time as the notes are converted into common stock or repaid, we accrue interest on the notes at the stated interest rate. We additionally remeasure the fair value of the notes at each reporting date and record a gain (upon decrease in fair value) or loss (upon an increase in fair value) for any change in fair value. Fair value is determined using a binomial valuation model, which requires the use of subjective assumptions, including unobservable inputs that are supported by little or no market activity. The assumptions represent our best estimates, but involve certain inherent uncertainties. Inputs to the model include the market value of the underlying stock, a life equal to the contractual life of the notes, incremental borrowing rates that correspond to debt with similar credit worthiness, estimated volatility based on the historical prices of our trading securities, and we make assumptions as to our abilities to test and commercialize our product(s), to obtain future financings when and if needed, and to comply with the terms and conditions of the notes. Since the determination of fair value is complex and involves the use of subjective assumptions, if our assumptions, estimates, or modeling approaches change and we use different assumptions or methods, our fair values could be materially different in the future.

Common Stock Warrants:  We record the fair value of the warrants we have issued for the purchase of common stock as a liability since they call for issuance of registered shares upon exercise, a condition that we may not be able to accommodate and which would then result in a net settlement of the warrants. Until the time the warrants are exercised or expire, the fair value is assessed at each reporting date utilizing a binomial valuation model with the same approach to inputs and assumptions as we use to estimate the fair value of our notes payable. Any change in fair value is recorded as a gain (upon a decrease in fair value) or loss (upon an increase in fair value) in the consolidated statement of operations. Since the determination of fair value of the warrants is complex and involves the use of subjective assumptions, if our assumptions, estimates, or modeling approaches change and we use different assumptions or methods, our fair values could be materially different in the future.

Results of Operations

During the first quarter of 2014, our operating activities focused on testing and commercial preparation of a predecessor version scaffold. In March 2014 we announced that our Fantom scaffold would be our sole focus for development and testing and we concurrently reduced headcount by approximately 45 percent and reduced other overhead costs to a lesser extent. In addition to the development and testing of Fantom in 2014, we began the initial human clinical trial of Fantom in December of 2014. During 2015, our operating activities have consisted of further refinement of Fantom and clinical trial activities to support increasing enrollments of patients with Fantom.

In November 2014, we issued 250 senior unsecured convertible notes, each with a face value of $100,000, and warrants to purchase 8,750,000 shares of our common stock. We received cash proceeds of $25.0 million from the notes at that time. We account for the notes and warrant liability at their fair values and have recognized non-cash losses in the consolidated statement of operations for the increases in fair values since the issuance date. Subsequent to our third quarter end, a total of 4,375,000 warrants were exercised on October 1, 2015, for cash proceeds of $9,506,000.

Comparison of the Three Months Ended September 30, 2014 and 2015

Our operating results for the three-month periods indicated are as follows (dollars in thousands):

 

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Research and development expense increased $1,474,000, or 50 percent, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase was primarily a result of our Fantom development focus during 2014 compared to our testing and clinical enrollment focus in 2015. Clinical costs increased $443,000 as a result of the difference in timing and number of Fantom patient enrollments during the third quarter of 2015 compared to the predecessor product patient follow-ups during the third quarter of 2014. Direct materials, including purchased catheters and polymer lasing costs, increased $294,000 due to the increased product needs for preclinical and clinical purposes and our continuation of process improvement efforts during the third quarter of 2015 as compared to the same period in 2014. Personnel costs, including benefits and stock-based compensation, increased $337,000 primarily due to an approximate ten percent increase in headcount between years and an additional $171,000 in stock compensation during the third quarter of 2015 that arose from the performance-based equity grants made in March 2015. During the third quarter of 2015, we made a non-recurring payment of $200,000 for non-stent intellectual property. Preclinical study costs increased $104,000 between comparative periods due to the timing and type of testing performed. The remainder of the change in research and development expenses between periods resulted from individually immaterial changes in lab supplies, quality control, engineering services, depreciation, and facilities expenses.

General and administrative expense increased $302,000, or 20 percent, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. This increase was primarily a result of recording an expected $210,000 in severance costs as of September 30, 2015 related to the transition to our new Chief Executive Officer. The remainder of the change in general and administrative expenses between periods was due to individually immaterial changes in salaries and other personnel costs, travel and entertainment expenses, investor relations costs, marketing and tradeshow costs, office supplies, facilities costs, audit and legal fees, depreciation, insurance, franchise taxes, and other overhead expenses.

Our other non-operating expenses during the third quarter of 2015 primarily arose from the issuance of convertible notes and warrants in November 2014. Interest expense of $475,000 on the convertible notes accrued during the three months ended September 30, 2015. We additionally recorded a $28,180,000 loss on the change in fair value of the notes and warrants during the three months ended September 30, 2015. Interest income was $1,000 and other income, which primarily arose from exchange rate gains, was $8,000 for the three months ended September 30, 2015.

Comparison of the Nine Months Ended September 30, 2014 and 2015

Our operating results for the nine-month periods indicated are as follows (dollars in thousands):

 

 

Research and development expense increased $953,000, or nine percent, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, primarily as a result of our change in product development to the Fantom scaffold in late March 2014, the related reduction in headcount on March 26, 2014, and the initiation of Fantom clinical trials in December 2014. Clinical costs increased $519,000 during the first nine months of 2015 as a result of the difference in timing and number of Fantom patient enrollments in 2015 compared to the predecessor product patient follow-ups in 2014. Direct materials, including purchased catheters and polymer lasing costs, increased $393,000 because of increased product needs for preclinical and clinical purposes and our initiation of process improvement efforts during 2015 as compared to 2014. During the third quarter of 2015, we made a non-recurring payment of $200,000 for non-stent intellectual property. Offsetting these increases, our personnel costs, including benefits and stock-based compensation, decreased $206,000 in 2015, primarily due to the approximate 46 percent decrease in headcount during March 2014; the $237,000 in severance benefits and payroll taxes recorded in 2014 was not repeated in 2015. The remainder of the change in research and development expenses between periods resulted from individually immaterial changes in lab supplies, quality control, preclinical expenses, engineering services, depreciation, and facilities expenses.

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General and administrative expense decreased a total of $795,000, or 14 percent, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014. A combination of items contributed to this decrease. Personnel costs, including benefits and stock-based compensation expense, decreased $937,000 primarily due to a decrease of $811,000 in stock compensation upon final vesting of stock option grants made in 2010 and 2011 for which comparative grants were not made in 2015. An additional $178,000 in severance benefits and payroll taxes recorded in 2014 was not repeated in 2015; the remainder of the decrease in personnel costs was due to an approximate 44 percent decrease in headcount during March 2014. Offsetting the personnel decreases, travel and entertainment increased $112,000 between the comparative periods as a result of travel required for clinical studies and we incurred $210,000 in severance costs in September 2015 related to the transition to our new Chief Executive Officer. The remainder of the change in general and administrative expenses between periods was due to individually immaterial changes in investor relations costs, office supplies, marketing and tradeshow costs, audit and tax fees, facilities costs, depreciation, insurance, franchise taxes, and other overhead expenses.

Our other non-operating expenses during the nine months ended September 30, 2015 primarily arose from the issuance of convertible notes and warrants in November 2014. Interest expense of $1,410,000 on the convertible notes accrued during the nine months ended September 30, 2015. We additionally recorded a $34,311,000 loss on the change in fair value of the notes and warrants during the nine months ended September 30, 2015. Interest income was $7,000 and other income, which primarily arose from exchange rate gains, was $51,000 for the nine months ended September 30, 2015.

Liquidity and Capital Resources

Sources of Liquidity

We are in the clinical testing phase of product development, but have not commercialized or generated revenue from the sale of any products and have incurred losses since our inception in June 1998. We do not anticipate having a product available for sale unless, and until, we successfully receive CE Marking or other regulatory approval, which we do not anticipate will occur until late 2016 at the earliest. We have incurred substantial losses since our inception; as of September 30, 2015, we had accumulated a deficit of approximately $304.9 million. We anticipate that we will continue to incur substantial net losses and cash outflows through at least 2016 as we continue our development work, conduct and complete preclinical and clinical trials, expand our corporate infrastructure, and prepare for the potential commercial launch of our products.

Our development efforts have been funded with a variety of capital received from angel investors, venture capitalists, strategic partners, hedge funds, the proceeds from our IPO in 2010, and the issuance of convertible notes in November 2014. Since our inception through September 30, 2015, we have received approximately $153.9 million in equity proceeds and $53.5 million from issuance of notes payable ($28.5 million of the notes payable were converted to common stock upon our IPO in 2010). We completed a financing in November 2014 that was intended to provide the ongoing capital for our operations, including the Fantom clinical trial and application for CE Mark. This financing was completed with the issuance of 250 senior unsecured convertible notes payable, each with a face value of $100,000, and warrants to purchase 8,750,000 shares of our common stock. Both the notes and the warrants have five-year lives. We received gross cash proceeds of $25.0 million from the notes upon the closing in November 2014.

As of September 30, 2015, we had approximately $12.3 million in cash and investments available for operations. Subsequent to our third quarter end, on October 1, 2015, we received cash proceeds of $9.5 million from the issuance of common stock upon the exercise of 4,375,000 warrants, which provided us cash and investments available for operations totaling $21.8 million as of October 1, 2015. We believe this balance as of October 1, 2015 will be sufficient to fund our operating and capital needs into, and possibly through, the third fiscal quarter of 2016. When, and if, the remaining 4,375,000 outstanding warrants are exercised, we would receive $11.4 million cash proceeds.

In order to successfully transition to profitable operations, we will need to achieve a level of revenues and product margins to support the Company’s cost structure. Until such time as we generate positive cash flow, we plan to continue to fund our operating and capital needs by utilizing our current cash and investments and by raising additional capital through equity or debt financings, strategic or other transactions, or through the exercise of the remaining warrants issued in November 2014. We currently have no set plans for raising additional capital.

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Cash Flows

Our cash flows for the periods indicated are as follows: 

 

Net Cash Flow from Operating Activities

Net cash used for operating activities during the first nine months of 2014 primarily reflects the net loss of $16,506,000. A total of $1,348,000 was due to the net changes in operating assets and liabilities. Non-cash expenses included $780,000 of depreciation and amortization and $2,940,000 of stock-based compensation.

Net cash used for operating activities during the first nine months of 2015 primarily reflects the loss from operations of $16,708,000 and the changes in operating assets and liabilities of $454,000. These items were offset by non-cash expenses of $2,368,000 for stock-based compensation, $811,000 of depreciation and amortization, and $41,000 of other non-cash expense. The accrued interest on convertible notes and the loss on change in fair value of convertible notes and warrant liability were non-cash items that had no effect on cash flows.

Net Cash Flow from Investing Activities

Net cash used in investing activities during the first nine months of 2014 consisted of $1,492,000 in receipts upon the maturity of short-term investments, offset by $383,000 in purchases of lab and other equipment and leasehold improvements.

Net cash used for investing activities during the first nine months of 2015 consisted of $754,000 for the purchase of lab and other equipment, offset by $498,000 received upon the maturity of certificates of deposit.

Net Cash Flow from Financing Activities

Cash provided by financing activities during the first nine months of 2014 resulted from $222,000 in proceeds from the issuance of common stock upon the exercise of employee and consultant stock options, offset by $143,000 in payment of progress costs associated with the financing transaction completed in November 2014.

Cash provided by financing activities during the first nine months of 2015 resulted from $221,000 in proceeds from the issuance of common stock upon exercise of employee stock options, offset by payment of $50,000 in issuance costs from the financing completed in November 2014.

Operating Capital and Capital Expenditure Requirements

To date, we have not commercialized any products. We do not anticipate generating any revenue unless and until we successfully obtain CE Mark or other regulatory approval to sell, or license for sale, our scaffolds or one of our other product possibilities. We anticipate that we will continue to incur substantial net losses and cash outflows for the next several years as we continue our development work, conduct and complete preclinical and clinical trials, apply for regulatory approval to sell our products, expand our corporate infrastructure, prepare to commercially manufacture and sell our products, and collect cash from sales of our product(s).

Until such time as we commercialize a product and reach a sales volume to generate positive cash flow, we plan to continue to fund our operating and capital needs by utilizing our current cash and investments. We had cash and investments totaling $12.3 million as of September 30, 2015; we received $9.5 million cash proceeds from the exercise of 4,375,000 warrants on October 1, 2015. We believe the combined balance of $21.8 million as of October 1, 2015 will be sufficient to fund our operating and capital needs into, and possibly through, the third fiscal quarter of 2016.  Additionally, the 4,375,000 warrants that remain outstanding, which have a five-year life, are exercisable at a price of $2.6073 per share. If the remaining warrants are exercised, we have the potential to receive up to $11.4 million cash proceeds. Management intends to pursue exercise of the remaining warrants.

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If the warrants are not exercised or if they are not exercised in time to accommodate our cash flow needs, if our available cash resources are insufficient to satisfy our liquidity requirements before we are able to maintain our operations from our cash inflows, or if we develop additional products or pursue new uses for our products, we may need to raise additional capital. Any such needed additional capital may not be available on reasonable terms, if at all. Additionally, we may be limited under the terms of the convertible notes as to the type, quantity, timing, or other aspects of a financing, unless the noteholders agree. Any financing, even one to which the noteholders agree, may result in additional dilution to our current securityholders, could have rights senior to those of our common stock, and/or could contain provisions that would restrict our operations. If we are unable to raise additional capital, if needed, we may be compelled to sell certain assets, including intellectual property assets. Even if we are able to commercialize our products and raise additional capital if and when needed, we may never become profitable, or if we do attain profitable operations, we may not be able to sustain profitability and cash flows on a recurring basis.

Because of the numerous risks and uncertainties associated with the development of medical devices, such as our bioresorbable scaffolds, we are unable to estimate the exact amounts of, or timing of, capital outlays and operating expenditures necessary to complete development, continue ongoing preclinical studies, conduct human clinical trials, successfully deliver a commercial product to market, and collect on our trade receivables. Our future funding requirements will depend on many factors, including, but not limited to:

Future capital requirements will also depend on the extent to which we acquire or invest in businesses, products, and technologies; we currently have no commitments or agreements relating to any of these types of transactions.

Contractual Obligations, Commitments, and Contingencies

The following table summarizes our outstanding contractual obligations as of September 30, 2015:

 

 

Off-Balance Sheet Arrangements

Not applicable.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2015, the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2015 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.  OTHER INFORMATION

 

Item 1. Legal Proceedings

We may from time to time become subject to various claims and legal actions during the ordinary course of our business. We are not party to any legal proceedings at the date of filing of this Quarterly Report on Form 10-Q.

 

Item 1A. Risk Factors

Our business is subject to various risks, including those described in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, which we strongly encourage you to review. There have been no material changes during the nine months ended September 30, 2015, from the risk factors disclosed in Item 1A of our Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

Not applicable.

 

Item 3. Defaults upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

Not applicable.

 

Item 6. Exhibits

The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

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INDEX TO EXHIBITS